The current restrictions on the current account and capital account are likely to further worsen Sri Lanka’s balance of payment situation instead of easing the pressure while driving the inflation up, ICRA Lanka warned.
“Many domestic industries are struggling to meet the demand due to shortages in inputs triggered by scarcity of forex and import controls. In addition, foreign trading partners may push back as seen from a statement made by the European Union (EU) Mission in Sri Lanka early August,” the Rating Agency stated.
As the latest import control measure, the Central Bank of Sri Lanka (CBSL) last month imposed a 100 percent cash margin deposit requirement against the importation of over 600 selected goods which would tighten the liquidity position of the importers. It immediately raised concerns of the country’s top importer, the EU, who were already unhappy with existing import controls.
“This will further dent economic activity and bring about scarcity in the targeted goods. The import controls and capital controls may be effective tools in managing short-term volatilities in the exchange rate but it comes at the expense of economic growth, external sector competitiveness, and cost of living for people,” ICRA Lanka said.
ICRA Lanka maintains that restrictions imposed on the current account and capital account are likely to blowback rather than improve the balance of payment situation.